Angela Merkel told voters that the euro secured German jobs and prosperity as
she made a vigorous defence of the single currency the centre piece of her
bid for re-election on Sunday.

At a campaign stop in Dresden, she confessed to the occasional frustration with the EU, saying that negotiations over agricultural policy sometimes left her "angry and a bit depressed", but made a passionate defence of the freedoms enjoyed by Europeans.

Speaking in the historic centre of the city, the Neumarkt, which was devastated by fire following Allied bombing in 1945, Mrs Merkel told the crowd: "It's good to have allies. It's important to us that our allies are our neighbours, the European Union."

As supporters waved orange banners carrying the single word "Angie", the German chancellor declared: "Next week, you will decide how Europe progresses." European countries had to stay competitive to maintain their generous welfare states, Mrs Merkel said.

"Europe has 500 million inhabitants, 7 per cent of the world's population. This 7 per cent per cent produce a quarter of what the world produces, 25 per cent of the world's GDP.

"These 7 per cent receive 50 per cent of social security benefits, half of all welfare spending. That is our social market economy. To keep that, we must stay competitive, must stay strong, stay innovative.

"If we don't, we can't have all this. Other countries aren't sleeping – not China, not India, not Brazil."

Several thousand Germans, many of them munching sausages or drinking beer, had gathered in Dresden's cobbled city square to hear her speak on Sunday afternoon.

Dotted among the crowd were a dozen banner-waving supporters of Alternative für Deutschland, Germany's Eurosceptic party. Their banners read: "The euro has failed."

More AfD supporters draped their party's flags out of the fifth storey windows of a nearby town house.

Just before she spoke, the podium was circled by a drone – a small remote controlled flying machine with four rotor blades – that had been fitted with a camera. Mrs Merkel glanced at it and chuckled as it crashed in front of the stage. According to police, the drone operator was seeking to take pictures for sale.

In her speech, she revealed her frustrations with European politics, telling the crowd: "If you're in Brussels and talking about whether you can agree on the agricultural policy, or this or that regulation, it can sometimes make you furious or a bit depressed."

But she added that she was convinced that: "the euro secures our jobs, secures our prosperity – 50 per cent of our exports are in the eurozone, 60 per cent of our exports are in the EU."

She offered sympathy to countries affected by the eurozone crisis. "Ten years ago we were the sick man of Europe, today we have come back to the fore through sensible reforms. We are the anchor of stability, the motor of growth. But we must have understanding for other countries that are in difficulties." "We will help, we will show solidarity, but countries must, in their own house, do their homework – reform is essential."

Wolfgang Schaeuble, Germany’s finance minister, admitted last month that Greece would need a further bail-out. At an election event in Ahrensburg, he said: “The Greeks need until 2020 until they have re-established debt sustainability according to the calculations we made then – and they weren’t overly pessimistic. We will have to help them again so that they don’t have to pay such high interest rates for this maturity.”

At the TV debate on Sept 1st, Mrs Merkel admitted for the first time that Greece may need more aid.

Earlier, German opposition parties had accused Mrs Merkel of lying about the risks of a new bail-out for Greece.

Greece has received two European Union/IMF bailouts totalling 240 billion euros. As Europe’s biggest economy Germany has the greatest exposure to Greek debt.

Voters in Bavaria went to the polls on Sunday in state elections a week ahead of Germany's national elections. Mrs Merkel's Bavarian sister party the Christian Social Union was expected to gain an outright majority in the state parliament according to an exit poll for the broadcaster ARD, which put them at 49 per cent. The CSU has governed Bavaria in coalition with the liberal Free Democrats after performing poorly at the last elections in 2008.

Mrs Merkel is expected to remain Chancellor after Sunday’s election. A Forsa poll last week had her Christian Democrat party on 39 per cent and her coalition partners the Free Democrats on 6 per cent. The opposition SPD were on 25 per cent and their allies the Greens on 9 per cent.

The Social Democrats’ campaign has been littered with gaffes, the latest of which was the decision by candidate Peer Steinbrueck to flip his middle finger at the camera in a pose for a German magazine.

Mrs Merkel's speech included digs at the opposition Social Democrats and Greens' plans to raise income tax. Tax rises would "throw a spanner in the works" of entrepreneurs who created jobs, Mrs Merkel said. She also attacked the opposition proposal for an 8.50 euro statutory minimum wage. The Christian Democrats favour sector-by-sector minimum wage agreements.

"There should be minimum wages, but they should be set by the people who understand wage-setting, trades unions and employers," she said.

The crowd in Dresden applauded her pledges not to raise taxes, and not to set a minimum wage. Afterwards, Brigitte Schiemann, 69, a retired secretary, said the chancellor was "wonderful – she had arguments for every problem". A banker, 49, who declined to give his name, described her as "warm and convincing". He added: "I think that we must help other European countries. But we must help them to stand on their own feet. In Greece, it's the poor people who carry the load while the rich don't pay taxes."